Buying BP in Alaska would be a big bite for Apache Oil

Posted: Monday, July 19, 2010

By Analysis by Tim Bradner

An announcement is expected from BP and Apache Oil in late July on a possible sale of BP assets to the Houston-based independent, and some of BP's Alaska assets are reported to be included in discussions now under way.

BP operates 16 out of 23 oil fields producing on the North Slope, and owns a significant interest in seven other fields as well as pipelines.

No comment was made by either BP or Apache on the negotiations or even confirmation they are under way, but the Wall Street Journal and other major newspapers have reported the talk, relying on sources familiar with both companies.

Such a sale could have wide ramifications for Alaska's oil and gas industry, but Alaskans familiar with BP's operations in the state doubt that the amounts being discussed, $10 billion to $12 billion in purchases, could buy all of BP's holdings, which include about 5 billion barrels of crude oil and the natural gas equivalent.

Further, it might be difficult for Apache to buy just a part of BP's holdings because of the way the operations are intertwined. For example, it wouldn't make sense to buy BP's stake in the mature fields of the Slope, like Prudhoe Bay, without also buying BP's share of the Trans-Alaska Pipeline System.

Owning a part of a pipeline in addition to an oilfield, so a producer can ship its own oil, is typically the way companies operate.

But not always. Anadarko Petroleum Corp. is a partner with ConocoPhillips in the Alpine oil field and has no share in TAPS.

On the other side of this, Conoco, prior to its merger with Phillips, divested the Milne Point field and cited its lack of pipeline ownership as a factor impairing the viability of its ownership of the field.

Conoco sold to BP, which does own a share of TAPS.

Although there are doubts that Apache could or would try to bite off such a huge chunk of the North Slope industry, the concept of an aggressive play for a mature asset fits the company's past growth strategy.

There are some who believe Apache would be more aggressive than BP in pursuing the redevelopment of older North Slope wells and would be more willing to try new ideas, which is typical of independents.

Analysts are mixed in their views. An analysis by UBS Investment Research noted that Apache has limited experience in Arctic development and the acquisition would be a large part of the company's portfolio, which could leave it exposed.

"Alaska is a challenging regulatory environment and while most environmental liabilities would presumably be indemnified, it would be difficult for Apache to assess incremental environmental costs required to safely operate assets," UBS said in its analysis.

It is unclear, however, how an Apache acquisition would play into other Alaska initiatives by BP, such as its work on an Alaska natural gas pipeline, which will require huge financial commitments, and BP's work in development of heavy oil and the offshore Liberty field, both relying on technology developed and owned by BP.

Also, the attitudes of ConocoPhillips and ExxonMobil, BP's partners in the North Slope leases, are important. One report circulating in Anchorage is that the partners would be reluctant to have Apache be the operator of whatever assets it acquires because of the company's lack of experience in he Arctic.

BP's existing operating staff would no doubt be retained, but Alaska, with its strict regulatory environment and complex politics, is new territory for Apache's management.

The state of Alaska would have to sign off on any sale.

It also is likely that the Apache talks are just one set of discussions BP is having, and that other companies are making offers. Many Alaskans familiar with the North Slope feel that a sale to Shell would make more sense.

Shell has heavy investments in offshore exploration plays in the Beaufort and Chukchi seas, and any oil or gas found in these areas would surely come to Prudhoe Bay.

If there were an opportunity, it would benefit Shell to own the infrastructure and field pipelines that would carry its oil, as well as a share of TAPS.

Shell also has a long history in Alaska and is familiar with the state.

It isn't widely known, but Shell made an aggressive offer for Atlantic Richfield Co.'s Alaska asset, Arco Alaska, before those were sold to Phillips Petroleum.

According to sources familiar with that offer, the state of Alaska opposed the Shell acquisition of Arco because Shell wanted to use its proprietary gas-to-liquids technology as a way of commercializing North Slope gas. The state wanted a gas pipeline.

BP has made announcements that it is trimming capital spending and will sell off some assets.

The company's Alaska management has said that they are not getting any indication that capital spending in the state in 2011 will be much lower than in 2010.

BP is investing about $800 million this year in its Alaska operations.